CORPORATE DISCLOSURE WEDNESDAY, AUGUST 14, 1974 U.S. SENATE, SUBCOMMITTEE ON BUDGETING, MANAGEMENT, AND EXPENDITURES AND THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittees met at 10 a.m., pursuant to call, in room 3302, Dirksen Senate Office Building, Hon. Lee Metcalf (chairman of the Subcommittee on Budgeting, Management, and Expenditures) presiding. Present: Senator Metcalf. Also present: Vic Keinemer, staff director; E. Winslow Turner, chief counsel; Jack Chesson, counsel; Jeanne A. McNaughton, chief clerk; Lyle Kyter, minority counsel, of the Subcommittee on Budgeting Management, and Expenditures. Senator METCALF. The subcommittees will be in order. This morning the Subcommittee on Budgeting, Management, and Expenditures and the Subcommittee on Intergovernmental Relations resume hearings on corporate disclosure. We will hear from Congressman Michael Harrington of Massachusetts. The staff will present data regarding New England interlocks. Norman Fischer, board chairman of Medalist Industries, will discuss problems posed by present method of securities registration in street. and nominee name. And we will hear from Martin E. Lybecker, who has just received. appointment as Adjunct Professor of Law at Georgetown University Law Center, and who is an authority or regulation of bank trust department investment activities. Recently Morgan Guaranty Trust provided some of us copies of its new brochure, entitled "Nominees". This publication is helpful in gaining a better understanding of nominee accounts. I have congratulated Morgan on its publication. An invitation was extended to Morgan to testify today, but it prefers not to, at this time. The invitation will be renewed at a latter date. I shall include now, for the hearing record, my August 9 letter to Morgan Board Chairman Ellmore C. Patterson.1 Our first witness this morning is Congressman Michael Harrington of Massachusetts. Congressman Harrington, we are delighted to have you here to tell us about your experience and your knowledge of interlocks in the New England territory. 1 See Appendix B, for Senator Metcalf's letter and Mr. Patterson's reply, p. 414. I am not as familiar with that area as I am of some of the western areas, but I think it will be a very valuable addition to the record for you to show us your knowledge of that area. I told you that we had a staff person from my office check the shareholders in the Montana Power Co. Much to our amazement and surprise the largest stockholder in the Montana Power Co. was Shawmut Bank. So I have also a parochial interest in some of these corporate interlocks in the New England territory. I know that you have to make a vote and you have to leave. You let me know and we will suspend and take up another witness and then you can come back. Thank you for coming and we are delighted to have you. I know you have a statement. So go right ahead. STATEMENT OF HON. MICHAEL J. HARRINGTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS Mr. HARRINGTON. Thank you, Senator. First, let me thank you for the chance to come before you today. I have a Foreign Affairs vote which will be the first order of business in committee and would like to make sure I get over there to vote on it. I don't know that I can really add to the kind of obviously substantive preparation and work that has been done by your own staff, Senator. This was prompted, to a degree, by an interest in an issue that in this season has found a constituency called utility activity in the State, an effort to begin to ask the FPC and SEC to do, in my opinion, what they should have been doing about 35 years ago, looking harder at the question of the relationships between banks and utilities, particularly since we have an ethic at work at least in Mr. Sawhill. I am convinced that the direction we are taking is to allow not only a passthrough of capital costs which are emerging as one of the significant facts of life in utilities, but also to speed up the process of approval of whatever the changes are in the rate structure. It evolved from this in an effort made to get some help on the question of the Holding Company Act of 1935 as it affected utilities and banks. I will say that at least on balance the SEC has shown it is more than interested and willing, and has turned the resource loose to provide the basis for the testimony I would like to give you this morning. If I could, I would like to read the prepared statement and be available for questions. First, my thanks for the opportunity to appear today to testify on utility-bank interlocks. Before beginning I would like to commend both the Subcommittee on Budgeting, Management and Expenditures and the Subcommittee on Intergovernmental Relations for the ground they have broken with the publication of the report on the disclosure of corporate ownership. The report makes a significant contribution to our understanding of just who controls our major industries and economic enterprises. I would like to limit my remarks this morning to one rather specific topic-interlocking directorates between public utilities and banks. Given the tremendous growth in the need for new plant capital by electric utilities and the increasing necessity of utilities to rely on debt, rather than equity financing, I believe it is important to take an in-depth look at the degree of concentration that exists between banks and utilities at the board of directors level. Any examination of this topic must begin with a look at two statutes: the Federal Power Act and the Public Utility Holding Company Act. Section 825(b) of the Federal Power Act reads as follows: (b) After six months from August 26, 1935, it shall be unlawful for any person to hold the position of officer and director of more than one public utility or to hold the position of officer or director of a public utility and the position of officer or director of any bank, trust company, banking association, or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or officer or director of any company supplying electrical equipment to such public utility unless the holding of such positions shall have been authorized by order of the Commission upon due showing in form and manner prescribed by the Commission, that neither public nor private interests will be adversely affected thereby. Section 17(c) of the Public Utility Holding Company Act also contains a prohibition against utility-bank interlocks. It reads as follows: (c) After one year from August 26, 1935, no registered holding company or any subsidiary company theerof shall have, as an officer or director thereof, any executive officer, director, partner, appointee, or representative of any bank, trust company, investment banking, or banking association or firm, or any executive officer, director, partner, appointee, or representative of any corporation a majority of whose stock, having the unrestricted right to vote for the election of directors, is owned by any bank, trust company, investment banker, banking association or firm, except in such cases as rules and regulations prescribed by the Commission may permit as not adversely affecting the public interest or the interest of investors or consumers. These are the statutes that govern utility-bank interlocking directorates. While these would seem to be rather restrictive statutes, an examination of the boards of directors of utilities and utility holding companies reveal otherwise. There are 17 registered holding companies in the United States with 689 men serving on their boards or the boards of their subsidiaries. Of these 689, 240, or 35 percent, also serve on the boards of directors. of banks. Leading the holding companies is Middle South Utilities, Inc., 65 percent of whose board members serve on bank boards. Next comes the Southern Company, 58 percent of whose members serve on banks. The holding company with the smallest interlock percentage, American Electric Power, still has a 15 percent interlock ratio. In my own area, the New England Electric System has 18 directors. interlocked with banks-35 percent of the company's total. Ten of Boston Edison's 14 directors-70 percent serve on the boards of banks. Coupled with additional interlocks between leading investment houses, insurance companies, and law firms, there is an intense degree of concentration of economic power and control revolving around our banks and utilities. Last year, I was involved in a case before the Securities and Exchange Commission regarding the sale of three gas companies from New England Electric to Eastern Gas and Fuel. As part of the intervenor's case, Professor John M. Kuhlman of the University of Missouri's Economics Department, and an expert on corporate concentra tion, prepared some charts outlining the interlocks between major Massachusetts utilities, banks, and law firms. These charts, which I would like to submit for the record, reveal an intricate spider web of associations between Massachusetts' most powerful economic concerns. Senator METCALF. They will be incorporated in the record. [The charts referred to follow:] |